Foreign debt on the rise

Our Ministry of Finance did well in preparing a strategy for public debt to be applied over four years, from 2016 to 2020, which can serve as a guide and a follow-up instrument.

A plan like this, with figures and detailed tables, presents the big picture and helps guide economic decision makers.

Comparison of actual figures with the plan will show whether things are going in the right direction, and thus continue the course, or in the wrong direction, which should call for a revision and adjustment of the fiscal behaviour.

The outstanding balance of external debt, denominated in foreign currencies, was at the end of 2010 equal to JD4,611 million, or 37.2 per cent of the gross public debt.

Five years later, at the end of 2015, external debt rose 100 per cent to reach JD9,390.5 million but, thanks to the growth of GDP in current prices, the ratio remained almost the same: 37.7 per cent.

This rate did not change during the first nine months of this year (2016), but it is expected to rise sharply during the last quarter of the year, due to the strong tendency to borrow externally, under the pretext that the government does not want to compete with private businesses and crowd out the private sector in obtaining credit from the local banking system.

By the end of the third quarter of 2016, the share of foreign debt remained stable as no net borrowing in foreign exchange took place during the first three quarters of the year.

This state of affairs will change before the end of this year.

The government is choosing to borrow big amounts in foreign exchange from the World Bank, the IMF and Japan. In that case, the rate of external debt may rise over 40 per cent. The risk will of course rise accordingly.

All these developments can be understandable and we got accustomed to them, but the new debt strategy adopted by the Ministry of Finance, and published in Al Rai newspaper on November 8, indicates that the government intends from now on to increase its dependence on external borrowing.

The strategy states clearly that the foreign debt share will rise not only in absolute figures but also from the present rate of 37.8 per cent to 62 per cent during the coming four years.

Admittedly, most foreign loans contracted by the government are of soft nature, in that the maturities extend to relatively long periods with low interest rate.

However, some foreign loans are agreed for a medium term and carry interest rate as high as 5.8 per cent.

Public debt in general carries an element of risk, in which it may lead to a financial crisis.

Such risk normally is evaluated on the basis of whether the public debt of a country is mainly denominated in foreign exchange, which, at one point, may put the economy under pressure.

If the bulk of debt is domestic, the risk will be very low as the country would be borrowing from itself.

Countries do not default in their own currency.

Unfortunately, the government is opting for external borrowing, so much so that its rate will rise over four years from 37.7 per cent to 62 per cent, a trend that deserves to be challenged.